- Caleres has experienced a lot of pain since the pandemic started, but the picture for the business is showing nice signs of improvement.
- On top of this, shares of the business are quite cheap at this point in time, making it a compelling prospect.
- Of course, the downside is that this isn't a high-quality play but is, instead, a decent company at a solid price.
- My assessment of the company would be higher if it weren't for the fact that the company continues to shrink its physical footprint.
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While the footwear that we place on our feet is often a subject of significant thought due to the impact it has on quality of life and others' perceptions of ourselves, the retailers that specialize in selling footwear are often overlooked. This seems to be particularly true when you put it in reference to the investment community. One such player in this market that deserves some consideration is a company called Caleres (NYSE:CAL). Due seemingly to the COVID-19 pandemic, Caleres has had a difficult time as of late. But some of its troubles also have existed prior to the pandemic in the form of inconsistent profits and even some net losses. Fortunately for investors, the worst for the company appears over. And on top of that, shares are trading at levels today that look to be rather appealing on an absolute basis and are probably more or less fairly valued on a relative basis. This might leave open some opportunity for patient, value-oriented investors to step in and capture a piece of a valuable enterprise on the cheap.
A specialty retailer
Originally founded as Brown Shoe Company, Caleres has grown into a rather sizable specialty retailer in the footwear market. Through both its retail shoe stores and its e-commerce sites, the company sells footwear for men, women, and children. In fact, during its latest completed fiscal year for which data is available, 61% of revenue was attributable to women's footwear. Another 23% was chalked up to men's footwear. Children footwear made up 10% of sales. And other clothing and accessories comprised the final 6%.
At first glance, the name Caleres may not be recognizable. But the company's largest brand, Famous Footwear, likely is. During its latest completed fiscal year for which data is available, this particular unit made up about $1.26 billion, or 59.7%, of the sales generated by Caleres. Through this segment, which includes access to over 900 Famous Footwear retail locations, the company sells a variety of brands ranging from Nike (NKE) to Skechers USA (SKX) to Crocs (CROX), and more. General price points for these products range from $20 all the way up to $260.
The other key segment that Caleres has is its Brand Portfolio segment. Through this, the company offers retailers and consumers access to leading brands, the former via its wholesale operations and the latter through both direct-to-consumer retail and e-commerce functions. Brands included under this segment include Naturalizer, Vionic, Sam Edelman, Dr. Scholl's Shoes, Blowfish Malibu, and more. On the wholesale side, the company reaches around 4,200 retailers while on the retail side it operates 90 stores. This particular segment was responsible for about 40.3% of the company's overall revenue in its latest completed fiscal year.
Over the past few years, the financial performance of Caleres has been rather interesting after seeing revenue grow from $2.58 billion in 2016 to $2.92 billion in 2019, it then plunged to $2.12 billion in 2020. Not only was there weaker demand as a result of the COVID-19 pandemic, there was also the decision by management to close some of its retail locations. At the end of 2019, for instance, the business had 949 stores in operation under its Famous Footwear segment and it operated 228 locations under its Brand Portfolio segment. A year later, the location count had dropped to 916 and 170, respectively. However, it would be a mistake to say that the 2020 fiscal year was the only difficult one for the business from this perspective. Store counts were even higher in 2018, coming in at 992 and 229, respectively. Fast forward to the end of the third quarter of the company's 2021 fiscal year, and the number of stores in operation come out to 905 and 90, respectively. Helping the company out some, but only modestly, is the amount of revenue that it generates from its e-commerce arm. As of the end of the latest quarter, online sales accounted for just 13% of the company's overall revenue.
Net profits for the company have been all over the map in recent years. In two of the past five completed fiscal years for which data is available, the company actually generated net losses. Fortunately, cash flow has been a bit more consistent. Between 2016 and 2019, it moved in a fairly narrow range of between $129.6 million and $191.4 million in 2020, cash flow is still robust, totaling $126.4 million. However, if we adjust for changes in working capital, the picture changes some. The range in the four years leading up to the pandemic was between $147.8 million and $171.6 million. But then, in 2020, it was negative to the tune of $25.5 million. A similar relationship can be seen when looking at EBITDA. In 2020, this was negative by $32.4 million.
The good news for investors is that the worst appears to be in the past. In the first nine months of 2021, for instance, sales came in at $2.10 billion. That represents an increase of 35.7%, with much of that growth attributed to growing comparable-store sales. Net profits of $103.2 million marked a significant turnaround compared to the $362.1 million loss achieved the same time one year earlier. Operating cash flow of $189.7 million beats out the $101.8 million reported in the first nine months of 2020. And the adjusted equivalent of this was $174.8 million, far higher than the $25.1 million in outflow the company experienced one year earlier. Meanwhile, EBITDA went from a negative $47.9 million to a positive $224.5 million.
For the 2021 fiscal year, management anticipates earnings per share up between $3.29 and $3.39. If we make certain adjustments, the expectation is for earnings per share to be between $4 and $4.10. This would imply, at the midpoint, profits of about $154.3 million. That would give us a price to earnings multiple of 5.3. This compares to the 12.9 that we get if we rely on 2019 figures. Having said that, I do not believe that earnings are a good measure of the success or failure of this business. I say this because of the extreme volatility they have exhibited in recent years. Cash flow is a far better determinant of its potential. If we assume that the improvement in profits in the final quarter of 2021, we have the same impact on operating cash flow and on EBITDA, then these metrics should be around $261.3 million and $335.6 million, respectively. That would imply multiples of 3.1 and 3, respectively, for the 2021 fiscal year. That compares to multiples of 4.8 and 5, respectively, if we rely on the 2019 data for the business.
To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 6.1 to a high of 15.2. Our 2021 results would imply our prospect being the cheapest of the group while the 2019 calculation would have four of the five companies being cheaper than our target. Using the price to operating cash flow approach, the range is 3.8 to 13.8. Once again, using the 2021 figures, Caleres was the cheapest of the group. And using the 2019 figures, it was cheaper than all but two. Finally, we arrive at the EV to EBITDA approach. This gives us a range of 2.5 to 8.4. Using the 2021 figures, only one prospect was cheaper than our company. And using the 2019 figures, four of the five were cheaper.
|Company||Price/Earnings||Price/Operating Cash Flow||EV/EBITDA|
|Destination XL Group (DXLG)||7.2||3.8||4.1|
|Boot Barn Holdings (BOOT)||15.2||13.8||8.4|
|Shoe Carnival (SCVL)||6.1||4.7||3.2|
As you can see from the valuation of Caleres relative to its peer group, where the company is on a pricing perspective varies significantly depending on which year we rely on for data. What is important to note is that, even on an absolute basis, shares look rather cheap no matter which case we examine. Add on to this the fact that the company is exhibiting something of a turnaround, and it might be a good opportunity to consider. But do not make any mistake. This prospect is not a quality operator. Moving forward, I fully suspect that management will continue shuttering locations. And I anticipate significant volatility for the business from year to year. Instead of being a high-quality operator that's trading on the cheap, this is more similar to the cigar butt stocks that Benjamin Graham liked to buy into. It may make for some nice upside in the near term. But I do not believe that it is a strong prospect for long-term investors.
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This article was written by
Daniel is an avid and active professional investor.He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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